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Wiiw Working Paper 85: Measuring the Effects of Trade Liberalization In June 2012 Working Papers | 85 | Mario Holzner and Florin Peci Measuring the Effects of Trade Liberalization in Kosovo wiiw Working Papers published since 2009: No. 85 M. Holzner and F. Peci: Measuring the Effects of Trade Liberalization in Kosovo. June 2012 No. 84 S. M. Leitner and R. Stehrer: Labour Hoarding during the Crisis: Evidence for selected New Member States from the Financial Crisis Survey. June 2012 No. 83 E. Bekkers and J. Francois: Bilateral Exchange Rates and Jobs. June 2012 No. 82 E. Bekkers, J. Francois and M. Manchin: Import Prices, Income, and Inequality. June 2012 No. 81 R. Stehrer: Trade in Value Added and the Valued Added in Trade. June 2012 No. 80 R. Stehrer, N. Foster and G. de Vries: International spillovers in a world of technology clubs. June 2012 No. 79 R. Stöllinger: International spillovers in a world of technology clubs. May 2012 No. 78 S. Leitner and R. Stehrer: Access to Finance and Composition of Funding during the Crisis: A firm-level analysis for Latin American countries. February 2012 No. 77 E. Bekkers and R. Stehrer: Reallocation Gains in a Specific Factors Model with Firm Heterogeneity. December 2011 No. 76 M. Holzner and F. Peci: The Impact of Customs Procedures on Business Performance: Evidence from Kosovo. August 2011 No. 75 C. Hornok: Need for Speed: Is Faster Trade in the EU Trade-Creating? April 2011 No. 74 S. Leitner and R. Stehrer: Subgroup and Shapley Value Decompositions of Multidimensional Inequality – An Application to Southeast European Countries. March 2011 No. 73 S. M. Leitner and R. Stehrer: Do Exporters Share Part of their Rents with their Employees? Evidence from Austrian Manufacturing Firms. February 2011 No. 72 S. M. Leitner, J. Pöschl and R. Stehrer: Change begets change: Employment effects of technological and non- technological innovations – A comparison across countries. January 2011 No. 71 M. 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Zieba: The Government Expenditure Multiplier and its Estimates for Poland in 2006-2009. March 2010 No. 62 A. Bhaduri: The Implications of Financial Asset and Housing Markets on Profit- and Wage-led Growth: Some Results in Comparative Statics. February 2010 No. 61 N. Foster and R. Stehrer: Preferential Trade Agreements and the Structure of International Trade. January 2010 No. 60 J. Francois and B. Hoekman: Services Trade and Policy. December 2009 No. 59 C. Lennon: Trade in Services: Cross-Border Trade vs. Commercial Presence. Evidence of Complementarity. November 2009 No. 58 N. Foster and J. Pöschl: The Importance of Labour Mobility for Spillovers across Industries. October 2009 No. 57 J. Crespo-Cuaresma, G. Doppelhofer and M. Feldkircher: The Determinants of Economic Growth in European Regions. September 2009 No. 56 W. Koller and R. Stehrer: Trade Integration, Outsourcing and Employment in Austria: A Decomposition Approach. July 2009 No. 55 U. Schneider and M. Wagner: Catching Growth Determinants with the Adaptive Lasso. June 2009 No. 54 J. Crespo-Cuaresma, N. Foster and R. Stehrer: The Determinants of Regional Economic Growth by Quantile. May 2009 No. 53 C. Lennon: Trade in Services and Trade in Goods: Differences and Complementarities. April 2009 Mario Holzner and Florin Peci Mario Holzner is a research economist at the Vi- Measuring the Effects enna Institute for International Economic Studies (wiiw). Florin Peci is a PhD candidate at the Faculty of Trade Liberalization of Economics, University of Prishtina. in Kosovo Contents Abstract ............................................................................................................................ i 1. Introduction .............................................................................................................. 1 2. Kosovo trade structure ............................................................................................. 3 3. The model ................................................................................................................ 5 4. The data ................................................................................................................... 6 5. The results ............................................................................................................... 7 6. Conclusions ............................................................................................................. 9 References ................................................................................................................... 11 List of Tables and Figures Table 1 Simulation effects of Kosovo SAA accession .............................................................. 8 Figure 1 Trade balance of goods, in EUR million ...................................................................... 3 Figure 2 Structure of exports and imports by economic category 2010, in % of total ............... 4 Abstract Similar to other countries in the European periphery, Kosovo lacks competitiveness, has adopted the euro as its national currency and started an integration process with the EU. The next milestone in this process is the signing of an FTA with the EU. We simulate full trade liberalization vis-à-vis the EU, using the Global Simulation Model. Our results sug- gest a slight output loss in almost all industries in Kosovo due to a drop in prices. Moreover the government budget is expected to lose about 5% of its revenues due to the tariff cut. A shift towards more direct taxation and an improvement of the investment climate in Kosovo is recommended. Keywords: trade policy simulation, Kosovo, EU integration JEL classification: F15, F17, P33 i Mario Holzner and Florin Peci Measuring the effects of trade liberalization in Kosovo 1. Introduction Kosovo has introduced a liberal trade regime as part of the regional trade liberalization processes, particularly those initiated by the Stability Pact for Southeast Europe (Bartlett, 2008). Although, not an official member of the Stability Pact, Kosovo committed itself to respect the obligations deriving from the Memorandum of Understanding (MoU) on Trade and Transport Facilitation in Southeast Europe (SEE), signed by the countries of SEE in 2001 (Sadiku, 2003). Practically, the MoU provided for (i) the elimination of tariffs on 90% of the volume of trade and 90% of tariff lines, (ii) the elimination of non tariff barriers to trade for intra-regional trade and the strengthening of trade in services, and (iii) the facilita- tion in trade (Damijan, de Sousa and Lamotte, 2006). The overall objective of the MoU was the implementation of bilateral Free Trade Agreements (FTAs) among the countries of the region. According to the MoU, FTAs were mandatory to the signatory parties, apart from Kosovo in which case countries were merely advised to sign an FTA if they deemed this step as beneficial. Kosovo signed the first FTA with Albania and later with Macedonia, Bosnia and Herzegovina and Croatia. The entire negotiation process was concluded by extending the Central European Free Trade Agreement (CEFTA) to the West Balkan countries in 2006, thus, converting the bilateral agreements into one single FTA. Kosovo acquired full CEFTA membership. Despite the fact that the ailing economy of Kosovo is facing severe difficulties coping with the consequences of trade liberalization, in the long run there may be several positive as- pects of this process. Since one of the purposes of CEFTA is the establishment of trade rules based on European Union (EU) and World Trade Organization (WTO) principles, it is expected that the experience gained in trade with the countries in the region will make Kosovo’s businesses competitive for the EU and World markets. In addition and in order to comply with the CEFTA rules and regulations Kosovo will establish and build up institu- tional and policy frameworks to comply with the requirements of the WTO. However, the experience of Kosovo with CEFTA so far has not been very positive due to the economic but also political barriers restraining Kosovo. At first, CEFTA was signed by the United Nations Interim Administration Mission in Kosovo (UNMIK) on behalf of Kosovo. Kosovo’s international representation for almost a decade was the reserved right of UN- MIK, and the negotiating process for bilateral FTAs and the CEFTA were conducted by UNMIK representatives. Thus, the question of legitimacy and Kosovo institutions’ compli- ance with this process has been raised. Also, Serbia and Bosnia and Herzegovina con- tinue not to recognize the institutions of the Republic of Kosovo. This has resulted in regu- lar holdups of Kosovo’s exports to these countries. 1 As regards the EU market, trade relations
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